Activity Code 10110 Version 4.7, dated November 2015 B-1 Planning Considerations A-133 Audit Audit Specific Independence Determination Members of the audit team and internal specialists consulting on this audit must complete the Audit Specific Independence Determination (w/p 34) prior to starting any work on this assignment. (Note: Because staff is sometimes added to on-going audits, supervisors should ensure that all individuals who are directing, performing audit procedures, or reporting on this audit as a member of the audit team who are performing as a consultant have signed this work paper. For example, an FAO may add additional auditors (e.g. FAO technical specialist) to the audit assignment or may need to consult with an internal specialist (e.g., industrial engineers, and operations research specialists) as the audit progresses.) Purpose and Scope: This audit program should be used for single audits conducted under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations." The program steps should be tailored, as appropriate. For audit areas with multiple sections, the auditor is permitted to remove the sections that are not relevant to the review based on the documented risk assessment. The audit program should reflect an understanding between the auditors and supervision as to the scope required. 1. An OMB Circular A-133 audit, otherwise known as a single audit, is an entity-wide audit consisting of two main parts: an audit of the basic financial statements and an audit of the entity s major Federal award programs. The audit of the major programs includes (a) gaining an understanding of and testing the internal controls and (b) a compliance audit governing laws and regulations and the provisions of contracts and grants of the Federal award programs. Circular A-133 requires the auditor to provide an opinion on whether the auditee complied with laws, regulations and the provisions of contracts or grants that have a direct and material effect on each of its major programs. 2. When DCAA does participate in an A-133 audit, it is on a coordinated basis. That is, the participants (i.e., DCAA, Independent Public Accountant (IPA), etc.) discuss and compare their individual audit/review requirements for the fiscal year and identify areas of duplication. The understanding of the individual parties audit responsibilities should be documented in a coordinated audit matrix. 3. It is important to determine the nature and extent of your audit. In some cases the contractor may elect to have their IPAs perform the entire A-133 audit. In such cases, you are not performing an A-133 audit. If an A-133 audit has already been issued, coordinate with the ACO and supervisor to determine what additional effort, if any, is necessary. Any additional audit planning and execution should consider the extent to which reliance can be placed on the work already performed by the auditee s IPA or internal auditors under the A- 133 requirements. Any additional audits or subsequent effort should be planned and performed in such a way as to build upon work already performed by other auditors. See CAM 13-703.4 1 of 70
Planning Considerations The auditor is required to test internal control over major programs to ensure that controls are designed and operating effectively, as well as testing compliance with the requirements of Federal programs for compliance with laws, regulations, and provisions of contracts and grants. Although the purpose of these tests is different, both may be achieved simultaneously through dual-purpose tests of details. That is, the auditor may design a sample that will be used for dual purposes: testing the control to assess control risk and testing whether the recorded monetary amount of transactions is correct. The auditor should use dual-purpose transaction testing when developing their sampling plan. However, auditors should not rely on tests of controls performed in prior audits as support for the basis of opinion as part of this compliance audit. The auditor is not required to plan and perform tests of internal controls when they are likely to be ineffective in preventing or detecting noncompliance with the requirements of major programs. In this case the auditor should report a significant deficiency, including whether any such deficiency is a material weakness, assess the related control risk at the maximum, and consider whether additional compliance tests are required because of the ineffective internal control. Planning Considerations Prior to commencing the audit, review guidance that may impact the audit and adjust audit scope and procedures appropriately. Guidance to review includes CAM, open MRDs, FAQ training materials, guidebooks, etc. available on the DCAA intranet. B-1 Preliminary Steps W/P Reference Version 4.7, dated November 2015 1. Evaluate the contractor's indirect cost rate proposal for completeness. For those entities subject to FAR Subpart 42.7 Indirect Cost Rates, the proposal submission must be accompanied by a Certificate of Final Indirect Costs. All proposal submissions should include sufficient schedules and detail (e.g. pools, bases, and rates, account balances within pools, and identification of grants, contracts, subcontracts, and subrecipients). 2. Complete the Coordinated Audit Matrix (Section C-1) to identify which audit participant will be responsible for reporting on the auditee s compliance requirements. 3. Contact the contracting officer to ascertain any known concerns (including risk related to the contractor s financial condition) that will impact the audit and adjust the audit scope and procedures accordingly. If information regarding the contractor s financial condition is not available from the contracting officer, the auditor should perform the procedures addressed in CAM 2-302.1h. If during the course of the audit the auditor becomes aware of unfavorable or adverse financial conditions, they should immediately communicate their concerns to the contracting officer, and appropriately adjust the scope of audit. 4. Electronically transmit an acknowledgement/notification to the 2 of 70
ACO/Buying Command notifying them of the commencement of the risk assessment and that the expected completion date will be provided in the formal acknowledgement/notification once the risk assessment is complete. (CAM 2-303). The acknowledgement/notification process should be within the timeframe and in accordance with the procedures in CAM 4-104. 5. Determine whether the auditee has classified Federal awards. Coordinate with the Field Detachment FAO, the auditee, and if applicable, the Independent Public Accountant (IPA) to identify areas of audit coverage. Document the results of the coordination of audit coverage on the FAO/FD Coordination Matrix (Section C-1). 6. Hold an entrance conference with the auditee. Follow up with contractor management on: a. on corrective actions that address previous DCAA audit findings and recommendations; b. other studies or audits that impact the subject matter under audit. 7. Issue a notification letter to the contractor regarding the audit in accordance with CAM 4-302.3. 8. Obtain the auditee s Summary Schedule of Prior Audit Findings so that related follow-up actions on previously reported deficiencies can be evaluated. 9. Meet with, review, and consider the internal audit department s annual audit plan and completed audits. 10. Review the permanent file and previous A-133 audit for audit leads/ findings. 11. Review permanent file to determine if previous audits included findings and recommendations that impact the subject matter under audit (GAGAS 5.06). If there were findings, auditors should document this information in the risk assessment and perform the following procedures: a. During the entrance conference, ask contractor management if corrective actions were taken to address findings and recommendations reported in previous DCAA audits (e.g., questioned costs, business system deficiencies, CAS audits) that are relevant to the subject matter of audit. If yes, have contractor explain corrective actions taken and determine if additional audit procedures should be included in the fieldwork to test the corrective actions. b. Document the results of the inquiry and the impact of the corrective actions to the subject matter under audit. (Note: The purpose of this question is to follow up with contractor on relevant prior DCAA audit findings that could have a material effect on the subject matter of audit.) 12. Review permanent file to determine if the contractor has previously 3 of 70
provided other studies or audits (e.g., summary listing of internal audits or external audit reports) that directly relate to the subject matter under audit (GAGAS 5.06). If there are no other studies or audits, document that information in the work papers and perform the procedures below. (If you do not perform the following procedures, you must document your justification for the departure.) a. During the entrance conference: Ask contractor management if internal audits were performed. If yes, request contractor provide a summary listing of the internal audits that would assist us in understanding and evaluating the efficacy of the internal controls relevant to the subject matter of the audit. Ask contractor management if other types of audits or studies were performed by other than DCAA (e.g., other Government audit agencies, consultants, Independent Public Accountants, etc.) that would impact the subject matter under audit. If yes, have contractor explain what type of audits or studies were performed, if there were any related findings or recommendations, and any contractor corrective actions taken as a result. b. If the review of the perm file or the contractor identifies relevant internal audits: Determine if access to these reports is necessary to complete the evaluation of the relevant internal controls to support the risk assessment or audit procedures related to the subject matter of the audit. There must be a nexus between the internal audit reports and the scope of this specific assignment. Document the results of the determination in writing. If assignment is at a major contractor location, coordinate with the CAC or FAO point of contact (POC) for internal audit reports to request the contractor provide access to the reports. If assignment is at a non-major contractor and the FAO does not have a designated POC, the auditor should request the contractor provide access to the internal audit reports. The request, issued by the CAC, FAO POC or auditor, should include information on how the internal audit report is relevant to the DCAA audit. Place a copy of the request in the assignment administrative work papers. c. If the review of the perm file or the contractor identifies relevant other audits or studies: Obtain publicly available information for the relevant other Government agency audits (e.g., websites for DoD IG or other IGs, service audit agencies, etc.). Make appropriate adjustments to your risk assessment and planned procedures based on the reported findings. 4 of 70
d. Document the results of the inquiries including the response received from contractor s for any request for access to internal audit reports. (If access was not granted this should include the contractor s rationale or justification for not granting access). e. Determine if additional audit procedures are needed to address any identified risk. (Note: The purpose of this question is to discover any new audit leads that could affect the scope of current audit). 13. Review the Board of Directors' and audit committee minutes and identify any items requiring follow-up. 14. Understanding and Evaluating the Entity s Internal Control Structure. a. If applicable, review the external auditor's internal control letter and/or the internal control report prepared by management that accompanies the financial statements and identify any items requiring follow-up. b. Using the framework and the guidelines in WP B-2, obtain and document an understanding of the contractor's internal controls that are relevant to the audit. With the proper planning auditors should be able to obtain and document a major portion of this understanding during a walk-through of the contractor's assertion. 15. Review and document on W/P B-3 the assessment of the need for technical assistance/assist audits. 16. Evaluate the entity s grants/contract briefings. a. Ensure that all auditable grants/contracts awarded during the year have been briefed. Any significant grants/contracts that the contractor has not briefed should be briefed as part of this audit. Identify the applicable regulations that pertain to the contracts, grants, and agreements under audit and determine the impact on the audit procedures to be performed. b. Identify any non-dod grants/contracts subject to audit and verify the audit effort is reimbursable (i.e., approval to bill our audit effort has been obtained from the customer where necessary). If not, adjust the audit scope and auditable dollars accordingly and coordinate with the auditee and IPA, if necessary. 17. Review the OMB A-133 Compliance Supplement in effect for the auditee s fiscal year being audited. Significant changes from the previous year will be listed in Appendix V of the Compliance Supplement. 18. During the entrance conference, or other appropriate meeting, make inquiries of contractor management regarding knowledge of any fraud or suspected fraud affecting the subject of this audit, managements awareness of allegations of fraud or suspected fraud affecting this audit, and management s understanding about the risks of fraud relevant to this audit. Note: This discussion and any data submitted should be 5 of 70
documented in the working papers. 19. Based on the team's understanding of the criteria, subject matter, and the contractor and its environment, hold a planning meeting with the audit team (at a minimum, Supervisor and Auditor) to discuss and identify potential noncompliances, due to error or fraud, that could materially affect the subject matter. The discussion should include: relevant prior audit experience (e.g., questioned cost, relevant reported estimating or accounting system deficiencies), relevant aspects of the contractor and its environment, risk of material noncompliance due to fraud (e.g., the extent of incentives, pressures and opportunities to commit and conceal fraud, and the propensity to rationalize misstatements), other known risk factors, the audit team s understanding of relevant internal controls, inquiries to the contractor regarding its fraud management plans and controls Document fraud risk factor/indicators (see - Sources of Fraud Risk Factors below) that are present and could materially affect the subject matter. If Fraud risk factors are present, document specific audit procedures designed to address the increased risk of material noncompliance due to fraud. Communication among audit team members about the risk of material misstatement due to error or fraud should continue as needed throughout the audit. Sources of Fraud Indicators: GAGAS Appendix Section A.10 Examples of Indicators of Fraud Risk (http://gao.gov/products/gao-12-331g) AU-C 240.A75 (Appendix A)- Consideration of Fraud in a Financial Statement Audit, Examples of Fraud Risk Factors (http://www.aicpa.org/research/standards/auditattest/downloa dabledocuments/au-c-00240.pdf) DoDIG s Contract Audit Fraud Scenarios and Resources website (http://www.dodig.mil/resources/fraud/resources.html) 6 of 70
(To access the Sources of Fraud Indicators, copy and paste the web address shown above into the address block in Internet Explorer.) 20. Major Program Determination. Identify the dollar threshold used to distinguish between Type A and Type B programs in W/P B. (The calculation is performed in W/P B-4). 21. Determine whether the auditee is considered a low risk auditee using the low risk auditee worksheet in W/P B-5. This determination is summarized in W/P B. 22. Summarize the results of the risk assessment and preliminary audit steps and identify the planned scope of audit in Section 9 of W/P B. C-1 Audit Coordination W/P Reference Version 4.7, dated November 2015 1. Complete the audit coordination matrix to ensure that all internal controls and compliance areas that DCAA is taking responsibility for are identified and agreed to among the audit participants. 2. If applicable, complete the coordination of audit coverage on the FAO/FD Coordination Matrix. 7 of 70
C-2 Audit Coordination Matrix Version 4.7, dated November 2015 Types of Major Program Compliance Requirements (Refer to Compliance Supplement, Parts 2&3) A. Activities Allowed or Unallowed B. Allowable Costs/Cost Principles C. Cash Management D. Davis- Bacon Act Compliance Requirement is Applicable (Y or N/A) Compliance Requirement Has Material Effect on Major Program (Y or N) Organization Accepting Responsibility for Providing Audit and Auditor Accepting Responsibility for Providing Reporting Coverage (Review Internal Control and/or Compliance Audit) Independent Public Accountant DCAA Other (Identify organization) E. Eligibility (The R & D cluster of programs normally does not have activity subject to this compliance requirement). F. Equipment and Real Property Management G. Matching, Level of Effort, Earmarking (Level of Effort and Earmarking are not applicable to the R&D cluster of programs). H. Period of Availability of Federal Funds I. Procuremen t and Suspension and Debarment Additional Comments 8 of 70
C-2 Audit Coordination Matrix Version 4.7, dated November 2015 Types of Major Program Compliance Requirements (Refer to Compliance Supplement, Parts 2&3) J. Program Income K. Real Property Acquisition and Relocation Assistance L. Reporting M. Subrecipient Monitoring N. Special Tests & Provisions Opinion on Schedule of Expenditures of Federal Awards Completion of Data Collection Form Other (list as applicable Compliance Requirement is Applicable (Y or N/A) Compliance Requirement Has Material Effect on Major Program (Y or N) Organization Accepting Responsibility for Providing Audit and Auditor Accepting Responsibility for Providing Reporting Coverage (Review Internal Control and/or Compliance Audit) Independent Public Accountant DCAA Other (Identify organization) Additional Comments Y: Denotes requirement is applicable and will be included in audit scope. N/A: Denotes requirement is either not applicable or is applicable but will not be included within this audit because (provide explanation in Additional Comments for example, the specific requirement does not have a direct and material impact on the major program, see working paper for documentation supporting this assessment). 9 of 70
C-2 Audit Coordination Matrix Version 4.7, dated November 2015 Types of Major Program Compliance Requirements (Refer to Compliance Supplement, Parts 2&3) Point of Contact: Auditee Independent Public Accountant DCAA Other Compliance Requirement is Applicable (Y or N/A) Compliance Requirement Has Material Effect on Major Program (Y or N) Organization Accepting Responsibility for Providing Audit and Auditor Accepting Responsibility for Providing Reporting Coverage (Review Internal Control and/or Compliance Audit) Independent Public Accountant DCAA Other (Identify organization) Additional Comments 10 of 70
OMB Circular A-133 Compliance Requirements Applicable to Entity (Yes or No) (If not applicable no additional documentat ion req d) If applicable, could the compliance requirement have a direct & material effect on the Major program (Yes or No) (1) Comments Audit Coverage by FAO (2) Audit Coverage by Field Detachment FAO FD A. Activities Allowed/ Unallowed B. Allowable Costs/Cost Principles C. Cash Management D. Davis Bacon Act E. Eligibility F. Equipment & Real Property Management G. Matching, Level of Effort*, Earmarking* H. Period of Availability of Federal Funds I. Procurement Suspension & Debarment J. Program Income K. Real Property Acquisition Relocation Assistance L. Reporting - Financial Performance* Special* M. Subrecipient Monitoring 11 of 70
OMB Circular A-133 Compliance Requirements N. Special Tests & Provisions Applicable to Entity (Yes or No) (If not applicable no additional documentat ion req d) If applicable, could the compliance requirement have a direct & material effect on the Major program (Yes or No) (1) Comments FAO FD Audit Coverage by FAO (2) *Not applicable to the research and development program per OMB Circular A-133 Compliance Supplement, Part 5. Audit Coverage by Field Detachment (1) A-133 requires testing of internal control over compliance and substantive tests of compliance only on those requirements that could have a direct and material effect on the program. (2) If not performed by the DCAA FAO or FD, coordinate with IPA to ensure audit coverage. Point of Contact: DCAA Regional FAO DCAA Field Detachment Auditee Independent Public Accountant Other D-1 Schedule Of Expenditures Of Federal Awards (SEFA) W/P Reference Version 4.7, dated November 2015 1. Request the auditee to reconcile the incurred cost submission to the SEFA. Review the auditee s reconciliation of the incurred cost submission to ensure all Federal awards have been included and coordinate with the auditee and IPA, if necessary. 12 of 70
2. Document the audit conclusion on W/P D. 13 of 70
E-1 Activities Allowed Or Unallowed Compliance Requirement A Version 4.7, dated November 2015 Note: The audit steps for reviewing the auditee s internal controls relating to Compliance Requirement A also apply to Compliance Requirement B Allowable Costs/Cost Principles. Testing of compliance for both requirements should be performed within the steps below. Dual purpose testing should be used for both internal control and compliance testing. Document the internal control audit procedure(s) covered by the dual-purpose test. The specific audit procedures performed should adequately demonstrate the auditor s understanding, testing, and assessment of control risk regarding the auditee s internal controls for the year under audit. In obtaining and documenting the understanding of internal controls relating to Compliance Requirement A & B, the auditor should consider and rely on, to the extent possible, the audit effort performed under the Control Environment and Overall Accounting Controls Audit. Document your reliance. For the testing of internal controls and compliance testing. OMB Circular A-133 requires those tests be performed annually. Control Objectives: To provide reasonable assurance that Federal awards are expended only for allowable activities and that the costs of goods and services charged to Federal awards are allowable and in accordance with the applicable cost principles and award terms and conditions. Suggested Audit Steps for Reviewing the Auditee s Internal Controls Relating to Activities Allowed/Unallowed (Requirement A) and Allowable Costs/Cost Principles (Requirement B) Control Environment. The auditor should obtain a sufficient understanding of the entity s control environment to determine the impact that it may have on the overall effectiveness of internal control over compliance. Consider the following in obtaining your understanding. 1. There is an organizational sense of conducting operations ethically, as evidenced by a code of conduct or other verbal or written directive. 2. If present, a governing Board has established an Audit Committee or equivalent that is responsible for engaging the auditor, receiving all reports and communications from the auditor, and ensuring that audit findings and recommendations are adequately addressed. 3. Management s positive responsiveness to prior questioned costs and control recommendations. 4. Management s respect for and adherence to program compliance requirements. 5. Key managers responsibilities are clearly defined. 6. Key managers have adequate knowledge and experience to discharge their responsibilities. 7. Staff is knowledgeable about compliance requirements and is responsible for communicating all instances of noncompliance to management. 8. Management is committed to competence and ensures that staff receive adequate training to perform their duties. 9. Management supports an adequate information and reporting system. 10. Management sets reasonable budgets for Federal and non-federal activities so that no incentive exists to miscode expenditures. 14 of 70
11. Management enforces appropriate penalties for misappropriation or misuse of funds. 12. There is organization-wide cognizance of the need for separate identification of allowable Federal costs. 13. Management provides personnel approving and pre-auditing expenditures with a list of allowable and unallowable expenditures. Risk Assessment. The auditor should develop a sufficient understanding of the risk assessment process currently employed by the entity in terms of its identification, analysis, and management of risks to determine the impact that it may have on the overall effectiveness of internal control over compliance. Consider the following in obtaining your understanding. 1. Program managers and staff understand and have identified key compliance objectives. 2. The organizational structure supports the identification of risks of noncompliance: a. Key managers have been given responsibility to identify and communicate changes. b. Employees who require close supervision (e.g., inexperienced) are identified. c. Management has identified and assessed complex operations, programs, or projects. d. Management is aware of results of monitoring, audits, and reviews and considers related risk of noncompliance. 3. Processes are established to implement changes in program objectives and procedures. 4. Management has a process for assessing risks resulting from changes to the cost accounting systems and has policies and procedures in place to reduce the risk to an acceptable level. 5. Management has a sufficient understanding of staff, processes, and controls to identify where unallowable activities or costs could be charged to a Federal program and not be detected. Control Activities. The auditor should obtain an understanding of the entity's control activities for this control objective. Consider the following in obtaining your understanding. 1. Operating policies and procedures are clearly written and communicated. 2. Procedures are in place to implement changes in laws, regulations, guidance, and funding agreements affecting Federal awards. 3. Management prohibits intervention or overriding established controls. 4. Adequate segregation of duties exists between performance, review, and recordkeeping of a task. 5. Computer and software program controls include such items as data entry controls, exception reporting, access controls, reviews of input and output data, along with computer general and security controls. 6. Supervision of employees is commensurate with their level of competence. 7. Personnel have adequate knowledge and experience to discharge their responsibilities. 8. Equipment, inventories, cash, and other assets are physically secured, 15 of 70
periodically counted, and compared to recorded amounts. 9. If present, a governing Board conducts regular meetings where financial information is reviewed and the results of program activities and accomplishments are discussed. 10. Procedures are in place that provide reasonable assurance that the distribution of charges as direct and indirect costs to all Federal programs is consistent. 11. Procedures provide for separate accountability for time charges and costs between Federal and non-federal activities. 12. Processes are in place to ensure timely updating of procedures for changes in activities allowed and the cost principles. 13. When applicable, procedures provide for rechecking the accuracy of computations. 14. Supporting documentation is compared to a list of allowable and unallowable expenditures. 15. Adjustments to unallowable costs are made where appropriate, and follow-up action taken to determine the cause. 16. Duties are adequately segregated between review and authorization of costs. 17. Accountability for authorization is fixed in a responsible individual(s) who is knowledgeable of the requirements for determining activities allowed and allowable costs, including costs charged to direct and indirect cost centers, in accordance with Federal program agreements and applicable Governmental circulars pertaining to cost principles. Information and Communication. The auditor should develop a sufficient understanding of the entity s information and communication processes to identify significant classes of transactions and how they are initiated, processed, controlled, and reported related to the control objective. Consider the following in obtaining your understanding. 1. The accounting system provides for separate identification of Federal and non-federal transactions and allocation of transactions applicable to both. 2. Adequate source documentation exists to support amounts and items reported. 3. The recordkeeping system is established to ensure that accounting records and documentation retained for the time period required by applicable requirements; such as OMB Circular A-110 (.53) and the provisions of laws, regulations, contracts or grant agreements applicable to the program. 4. Reports are provided timely to managers for review and appropriate action. 5. Accurate information is accessible to those who need it. 6. Reconciliations and reviews ensure accuracy of reports. 7. Internal and external communication channels are established (e.g. staff meetings, bulletin boards, email, etc.) 8. Employees duties and control responsibilities are effectively communicated. 9. Communication channels for staff to report suspected improprieties are 16 of 70
established. 10. Actions are taken as a result of communications received. 11. Communication channels are established between the pass-through entity and subrecipients. 12. Reports, such as a comparison of budget to actual, are provided to appropriate management for review on a timely basis. 13. There are adequate internal and external communication channels on activities and costs allowed. 14. Training programs, both formal and informal, provide knowledge and skills necessary to determine activities and costs allowed. 15. There is adequate interaction between management and staff regarding questionable costs. 16. Grant agreements (including referenced program laws, regulations, handbooks, etc.) and cost principles circulars are available to staff responsible for determining activities allowed and allowable costs. Monitoring. The auditor should develop a sufficient understanding of the entity s ongoing monitoring activities relevant to the control objective. Consider the following in obtaining your understanding. 1. Ongoing monitoring is built-in through independent reconciliations, staff meeting feedback, rotating staff, supervisory review, and management review of reports. 2. Periodic site visits are performed at decentralized locations (including subrecipients) to determine whether procedures are being followed. 3. Follow-up on irregularities and deficiencies is performed to determine the cause. In addition, management takes appropriate follow-up action for significant identified problems or weaknesses in internal controls (including matters communicated by the auditors). 4. Internal quality control reviews are performed. 5. Management meets with program monitors, auditors, and reviewers to evaluate the condition of the program and controls. 6. Internal audit routinely tests for compliance with Federal requirements. 7. If present, a governing Board reviews the results of all monitoring or audit reports and periodically assesses the adequacy of corrective action. 8. Management periodically reviews supporting documentation of allowable cost information. 9. Information from federal and other agencies flows to appropriate management personnel. 10. Management compares budgeted to actual or prior year to current year costs and variances are investigated. 11. Internal audits, either formal or informal, are performed. Detailed Audit Steps 1. Document your understanding of the internal controls for each internal control component (i.e., control environment, risk assessment, information and communication, control procedures, and monitoring) over compliance for Compliance Requirements A and B. Consider the auditee s policies and procedures and identify relevant controls providing 17 of 70
assurance that the compliance objectives are achieved. 2. Perform tests of controls for the relevant controls identified. Document the audit conclusion on control effectiveness on W/P E. 3. Assess control risk to identify factors relevant to the design of substantive tests. Suggested Audit Steps for Reviewing the Auditee s Compliance with Activities Allowed or Unallowed Audit Objective: Determine whether Federal awards were expended only for allowable activities. 1. Identify the types of activities which are either specifically allowed or prohibited by the laws, regulations, and the provisions of contracts or grant agreements pertaining to the program. 2. Select a sample of transactions and verify that the transaction was for an allowable activity. 3. Summarize the results. W/P Reference 18 of 70
F-1 Allowable Cost Cost Principles Compliance Requirement B Version 4.7, dated November 2015 Suggested Audit Steps for Reviewing Compliance with Allowable Costs/Cost Principles The procedures are suggested audit procedures and should be tailored to the needs of the auditor and the circumstances. Preliminary Steps 1. Upon receipt, the entity's indirect cost rate proposal should have been evaluated for adequacy. If the submission was previously determined to be adequate and upon closer review is determined to be inadequate, coordination of the inadequacies should be immediately communicated to the contractor and cognizant ACO. 2. MAAR 3: Obtain current organization charts. Compare to charts contained in the permanent file; identify any changes in organizational structure. Assess the impact on this audit.. Update the permanent file. 3. If the entity has CAS-covered contracts, the auditor should consider entity compliance with the applicable CAS requirements and Disclosure Statement as part of their transaction testing steps. 4. Evaluate any changes in procedures for charging direct/indirect labor (MAAR 7) and assess the impact on this audit. 5. Reconciliations: a. MAAR 4: Evaluate the entity s reconciliation of the submission to the financial statements. Check the notes to the financial statements for possible audit leads. Note unusual items for audit follow-up. b. MAAR 9: Review the entity s reconciliation of payroll totals (dollar value and hours) with totals of related labor cost distribution records. The auditor should have the entity reconcile total salaries and wages to payroll tax returns (IRS Form 941) to ensure all labor has been accounted for and paid. c. MAAR 14: Check the entity's reconciliation of claimed base and pool amounts to the entity's cost accounting records and to totals of the detail accounts already reconciled. d. MAAR 15: Compare base and pool totals to prior year and budgetary amounts. Determine if the indirect rate structure used to accumulate actual costs is consistent with the indirect rate structure used to prepare forward pricing indirect rates for the same year. MAAR 15: Compare detail accounts within pools to prior years and budget to identify any changes in accounting practices or unexplained disproportionate changes in relative dollar value for follow-up. e. MAAR 19: Verify the accuracy of the entity's rate computations for W/P Reference 19 of 70
distributing indirect costs to grants/contracts. 6. Other items to be evaluated: a. Determine if the entity uses its fiscal year as its cost accounting period. b. Calculate Government cost-type and T&M/FPI percentages of indirect expense bases using the schedule of direct costs by element. 7. If a billing system audit was not performed in this CFY, test the entity s reconciliation of booked to billed costs. a. Evaluate materiality of any overbilled amounts at both the total and individual contract level. b. If the overbilled amounts are considered to be material, discuss with the supervisor the need to set up a billing system audit. c. If the entity also performs as a subrecipient, specifically test some subcontracts to ensure that adjustment vouchers are submitted to the prime entity on a timely basis following the settlement of rates. Indirect Allocation Bases (MAAR 18, D/S 4.1.0 through 4.2.0) 1. Evaluate the entity's indirect cost allocation bases for equity and consistency with generally accepted accounting principles, FAR, and CAS (including the applicability of the allocation bases). 2. Determine if the same accounting period is used for accumulating costs in an indirect cost pool as for establishing its allocation base. 3. Determine whether all unallowable costs categorized as direct costs are included in the allocation base for the purpose of allocating indirect costs. Direct Material The transaction test steps appearing below are an outline that prompts performance of MAARs and cites related CAM references for further guidance. Any supplemental audit steps should be added and budgeted into this outline during the process of finalizing the audit program. 1. MAAR 10: Evaluate adjusting entries for both direct and indirect purchased services and material (including subcontract costs and intraorganizational charges). 2. MAAR 13: Evaluate the results of the purchases existence and consumption review and the impact on this audit. (CAM 6-305.3a(2)). 3. Based on the results of the risk assessment, select a sample of material transactions for testing. 20 of 70
4. Summarize the results of the testing of direct materials. Auditable Subcontracts (MAAR 12) The transaction test steps appearing below are an outline that references related preliminary steps and applicable CAM references for further guidance. Any supplemental audit steps should be added and budgeted into this outline during the process of finalizing the audit program. 1. Verify the entity's schedule of auditable type subcontracts and intracompany orders under auditable type Government contracts and subcontracts. 2. Arrange for necessary assist audits as determined in Section B-1, Step 11. 3. If assist audit(s) were received and cover the time period under audit, compare the allowable costs in the assist audit report(s) to the amounts claimed. Significant differences should be further reviewed. 4. For the remaining costs where assist audits are not being performed, based on the risk assessment, select a sample of subcontracts/intracompany costs for testing. 5. Summarize the results of any assist audits received related to claimed subcontract/intracompany costs and any other testing of subcontract costs. Direct and Indirect Labor The transaction test steps appearing below are an outline that prompts performance of related MAARs and cites applicable CAM references for further guidance. Any required supplemental audit steps should be added and budgeted into this outline during the process of finalizing the audit program. 1. MAAR 6: Evaluate the result of the labor floor checks or labor interviews and assess its impact on this audit. (CAM 6-404) 2. MAAR 8: Perform a comparative analysis of sensitive labor accounts identifying any areas accounts requiring further review.(cam 6-404.6b(4)) 3. MAAR 10: Evaluate significant adjusting journal entries. (CAM 6-404.6b(6)) 4. Executive Compensation: Perform sufficient steps to determine whether any allocable direct and indirect executive compensation that is in excess of the statutory compensation ceilings (see CAM 6-414) has either been appropriately (i) excluded from the entity's incurred cost submission or (ii) identified as expressly unallowable costs and questioned in the audit report. 21 of 70
5. If the compensation of executives and other high risk employees, including those who are paid at or below the ceiling amounts is considered material, verify that the compensation of these employees is reasonable and allowable in accordance with FAR 31.205-6, or other applicable federal or grant regulations. 6. Based on the results of the risk assessment, select a sample of labor transactions for testing. As part of this testing, confirm that the compensation rate paid conforms to the established policy of the entity and is consistently applied to both Federal and non-federal activities. 7. Summarize the results of the testing of direct/indirect labor. Other Direct Costs (ODC) The transaction test steps appearing below are an outline that merely prompts performance of MAARs and cites related CAM references for further guidance. Any supplemental audit steps should be added and budgeted into this outline during the process of finalizing the audit program. 1. Identify the universe of job numbers or grants/contracts that contain ODCs. 2. Based on the results of the risk assessment, select a sample of ODC transactions for testing. 3. Evaluate source documents for completeness and accuracy, and determine the appropriateness of the charges with respect to terms of the contracts/grants and applicable regulations. 4. MAAR 10: Evaluate adjusting journal entries and exception reports for other direct costs. (CAM 6-305.3a(1)) 5. Summarize the results of the ODC testing. Additional Direct Cost Procedures Applicable to Grants/Contracts Subject to the OMB Circular A-122 Cost Principles: Determine whether the following costs are charged as direct costs and allocated an equitable share of indirect costs. 1. Maintenance of membership rolls, subscriptions, publications, or related functions. 2. Providing services and information to members, legislative or administrative bodies, or the public. 3. Meetings and conferences, except those held to conduct the general administration of the organization. 4. Maintenance, protection, and investment of special funds not used in the 22 of 70
operation of the organization. 5. Administration of group benefits on behalf of members or clients, including life and hospital insurance, annuity or retirements plans, financial aid, etc. Additional Direct Cost Procedures Applicable to Grants/Contracts Subject to the OMB Circular A-21 Cost Principles: 1. Based on the audit effort performed, document the conclusion as to whether the direct costs were estimated, accumulated, and reported consistently (A-21, Section C.10). 2. Based on the audit effort performed, document as to whether the costs charged directly to institutional activities (i.e., research and development, instruction, other institutional activities) are accounted for consistent with their disclosed practices, as described in their DS-2, if applicable (A-21, Section C.14). 3. Based on the audit effort performed, Verify and document as to whether departmental costs charged direct to institutional activities are consistently charged directly, in like circumstances, and are in accordance with the provisions of A-21 and CAS. 4. Verify costs for general-purpose equipment charged direct to institution activities are consistently charged as direct, were approved by the awarding agency, and are in accordance with the provisions of A-21 and CAS. 5. Verify salaries and wages charged to Federal awards are allowable to the extent that total compensation to the individual employee conforms to established policies of the institution, are consistently applied, and provided that the charges for work performed directly on sponsored awards have been determined in accordance with and supported by the provisions of A-21, Sections J.10, including the following: a. Distribution of salaries and wages is based on payrolls documented in accordance with the generally accepted practices of the institution. b. Apportionment of employees salaries and wages, which are chargeable to more than one sponsored agreement or other cost objective, is accomplished by methods which-- (1) Comply with A-21, Sections A.2 and C, (2) Produce an equitable distribution of charges for employees activities, and (3) Distinguish the employees direct activities from their indirect activities. c. The payroll distribution is based on an after-the-fact confirmation or determination that costs distributed represent actual costs. Confirmation should be by a responsible person with suitable means 23 of 70
of verification that the work was performed. Confirmation by the employee is not required if other responsible persons make appropriate confirmations. Indirect Expenses (Provisional Rates) The following audit steps apply to provisional rates or when auditing fixed rates with carry-forward provisions for purposes of establishing the carryforward amount for a future period. The transaction test steps appearing below are an outline that prompts performance of MAARs and cites applicable CAM sections for additional guidance. Any supplemental audit steps should be added and budgeted into this outline during the process of finalizing the audit program. 1. MAAR 5: Review the General Ledger, Trial Balance and closing/adjusting entries for any income and/or credit adjustments that may impact Government contracts. (CAM 6-608.2d(5). 2. MAAR 16: Indirect Account Analysis (CAM 6-608.2). Perform transaction testing of critical or sensitive accounts and accounts selected through the MAAR 15 evaluation. Evaluate costs for allowability, allocability, and reasonableness. 3. MAAR 10: Evaluate significant adjusting entries. (CAM 6-608.2c(2)) 4. Miscellaneous indirect/odc audits. (CAM 6-608) a. Review the entity s IRS Form 941s (Employer s Quarterly Federal Tax Return) for the year(s) under audit to identify employee taxes withheld (liability) and employer matching payroll taxes (expenses) to determine total payroll taxes owed. b. Verify timely payment of payroll taxes through the entity s use of IRS Form 8109 (Federal Tax Deposit Coupon), Electronic Federal Tax Payment System (EFTPS), or other information to support the entity s payment. If the entity failed to pay payroll taxes when due, it is delinquent in payment in the normal course of business and those costs should be questioned under FAR 52.216-7 b.(1)(ii) 5. Unallowable costs (FAR 31.201-6): a. Determine if expressly unallowable costs, mutually agreed to be unallowable costs, costs which specifically become designated as unallowable by contracting officer s written decision, and directly associated costs are identified and excluded. b. Evaluate voluntary deletions and questioned costs for directly associated costs that should also be excluded/questioned. (FAR 31.201-6(a)). 24 of 70
6. Summarize the results of the review of the indirect expenses. Additional Indirect Cost Procedures Applicable to OMB Circular A-122 Covered Nonprofit Organizations (NPO) 1. For NPOs that also have awards containing award-specific rates (approved by the Federal awarding agency) that take precedence over the negotiated rate for purposes of indirect cost recovery, ascertain that the award-specific rate is only being used for the approved award. a. Obtain and read the award terms used to establish an award-specific indirect cost rate(s). b. Select a sample of claims for reimbursement and verify that the award specific rate(s) was used and applied to the appropriate base(s). Verify that the cost included in the base(s) is consistent with the terms of the agreement. Indirect Cost (Fixed with Carry-Forward Rates) At an entity using a fixed rate with carry-forward provisions, the indirect costs have been established by the negotiated fixed rate for the A-133 year of audit. For testing compliance with A-133, the following step applies. [Note: For purposes of establishing the carry forward amount for a future period, auditors should follow the steps in the Indirect Cost (Provisional Rates) section provided above.] 1. Select a sample of claims for reimbursement and verify that the rates used are in accordance with the rate agreement, that rates are applied to the appropriate bases, and that the amounts claimed were accurate. Special Purpose Evaluations NOTE: Any audits belonging to this area that were performed elsewhere should be cross-referenced here. If a separate audit has not been completed, a supplemental audit program, as noted below, is required to perform the required effort. 1. Pensions. a. If pension costs are incurred for the year, the Standard Audit Program Incurred Pension Cost and CAS 412 and 413 Compliance, DMIS Activity Code 19412, should be used to evaluate those costs and the entity s compliance with applicable provisions of CAS 412 and 413. b. If no pension costs are incurred for the year, the following steps should be performed for defined benefit plans: (1) Determine if any events have occurred since the last audit that would require an adjustment to previously determined pension costs per CAS 413.50(c)(12); i.e., a segment closing, pension plan 25 of 70
termination, or curtailment of benefits. If so, in addition to completing the steps below, a special CIPR must be performed using the Standard Audit Program CAS 413.50(c)(12) Segment Closing Adjustments, under DMIS Activity Code 19413. (2) Evaluate the Trustee report and obtain an explanation for any significant withdrawals of pension assets. Perform additional audit steps as needed to ensure that Government contributed pension assets are protected. (3) Determine if any events have occurred since the last audit that may result in conditions that require segment accounting (CAS 413.50(c)(2) and (3)). If so, recommend to the ACO that a special CIPR be performed to verify that the entity has complied with CAS 413.50(c)(2), (c)(3) and (c)(5). (4) If the entity s practice is to calculate pension costs by segment: (a) Verify that the records required by CAS 413.50(c)(7) are properly maintained and that investment earnings of the trust are allocated in accordance with CAS 413.50(c)(7). (b) Determine if the transfer of active employees among segments distorts the ratio of assets to the actuarial accrued liabilities. (c) If so, verify that assets equal to the employees actuarial accrued liabilities (determined using the accrued benefit cost method) were transferred in accordance with CAS 413.50(c)(8). Consider requesting the assistance of the DCMA pension specialist through the ACO (CAM 5-1303.1c). NOTE: Pension and insurance costs are audited by the FAO cognizant of the entity location where the plans are administered and the costs are incurred. A-122 Special Requirements for Internal Service, Central Service, Pension, or Similar Activities or Funds 26 of 70